Posted by: Dirk | August 11, 2009

China’s export-strategy: when markets are absent

Quoted from Adam Tooze’s excellent The wages of destruction, p. 388:

The best measure of the success of Schlotterer’s cynical system was the gigantic deficit that Germany was able to accumulate by the end of the war. Normally, of course, private suppliers in France, Belgium or the Netherlands would not have been willing to go on delivering goods to a foreign customer that had tens of billions of Reichsmarks in unpaid bills. But since the 1930s the Reichsbank’s clearing systems had to been designed to remove any such obstacles. Exporters in each country were paid, not paid by their customers in Germany, but by their own central banks, in their own currency. The foreign central bank then chalked up the deficit to Germany’s clearing account in Berlin. The Germans received their goods, the foreign suppliers received prompt payment, but the account was never settled.

This is what makes the People’s Bank of China stay up all night: what if the value of US assets will fall in the future? It is strange to say, but the way China finances the US resembles a system from WWII, where countries were not especially eager to join such as a system, which was created for the benefit of the Nazi economy. I believe that its the short-comings of central planning that drive the Chinese government to accept such a strange strategy. In the domestic economy it is not clear what should be produced and how much. The lack of free markets and the price system which come with them leaves the government of China without much information what people want. Therefore, to increase employment it is easier to produce goods that other people outside the country want. China’s export strategy fixes a problem of central planning. There is no information on what domestic demand looks like, and hence the central government simply does not exactly know what to produce and how much of it.

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